The world's economic 'canary in the coal mine' faces a growing threat

A
customer browses LG Electronics' television sets, which are made
with LG Display flat screens, in Seoul, South Korea, on July 23,
2015.REUTERS/Kim
Hong-Ji

South Korea's export data for June has been released, and the
numbers are slightly better than expected.

The data suggests that South
Korea's second-quarter exports have, to some extent, bounced back
from the first quarter's lows.

The country's export value rose
9.9% versus last month, compared to a 0.7% YoY drop in May.
Excluding ship exports, which often inflate the numbers, export
value still improved by 3.6%.

This seems to bode well for the global economy. South Korea is
known as an economic
"canary in the coal mine," because it's the first country to
release its trade data for the preceding month and because it's
the fifth-largest global exporter, which makes it a pretty good
indicator of global trade activity.

But despite the rise in exports in June compared to May, South
Korea's exports are still decreasing on a year-over-year basis,
albeit less severely — -2.7% this month versus -6% in May. And
the country continues to face threats from China's increasing
industrial sophistication, which
economists have been warning will soon surpass South Korea's.

Over the past decade, Chinese
companies have been rapidly moving up the value chain, producing
the high-end goods that are normally imported from more
advanced countries. This has had some positive effects in the
region — less advanced countries, such as Vietnam and Bangladesh,
have taken the opportunity to take China's place in low-end
manufacturing — but it's been particularly disruptive for South
Korea.

UN
Comtrade

China is now producing the
intermediate goods that it used to import, as well as
producing and exporting some of the high-end technology that
South Korea was known for, such as mobile phones and flat-screen
TVs.

So not only do they not need
South Korea's imports, but they're also taking over much of it's
market share in these key sectors — a big reason
that exports have been declining in the past few
years.

According to a new research note
from Capital Economics, historically it has been mostly South
Korea's electronics companies that have suffered amid increased
competition from China, but that could soon change as
well.

Chinese car companies have been doing well, and could soon gain
market share from South Korean companies. Morgan Stanley
calculated that automobile exports declined 12.3% — on a YoY
basis — in June, compared to 8.9% in May. And the auto industry
isn't the only business being threatened by China.

ITC, Capital Economics

South Korea's mobile-phone exports decreased 36.4% on a YoY basis
in June, versus a 26.5% drop in May, thanks to gains made by
China.

Additionally, China is also
rapidly gaining market share in the shipbuilding industry, and
recently overtook South Korea as the world's biggest
shipbuilder.

As China continues to advance its technology and gain market
share in high-value products, South Korea's trade will likely
continue to decline.

Some South Korean companies have
been attempting to take advantage of the booming Chinese consumer
sector to establish themselves as exporters of premium consumer
goods, but these exports currently account for just 3.4% of total
exports.

As South Korea deals with this competitive threat, as well as
the potential impact on trade from the Brexit, its growth
prospects — and thus, perhaps, those of the global economy — do
not look strong. Capital Economics estimates an average growth
rate of just 2% over the next decade.